Do your eyes light up at the thought of going on a business trip and all the tax deductions you might enjoy while "living the life" on the road? Would you like to incorporate some vacation time into that business trip as well? Tread carefully. The IRS knows this game, and they have set out some pretty specific guidelines as to what's tax deductible for your next business trip.
What Constitutes a Business Trip?
In order to determine what is tax deductible as a "travel expense," we need to define what a business trip is. A business trip involves travel to somewhere that is not your main place of business.
In order to claim the whole enchilada of travel expenses, there must be a reasonable need to stay overnight. A one-day business trip doesn't count for tax-deduction purposes. (Certain expenses like transportation would of course be deductible under other categories, but the cost of meals, for example, would not.)
Location independent professionals might have trouble defining a main place of business for tax purposes. In fact, in the eyes of the IRS, you could be considered "transient" and your tax home is simply wherever you choose to work. As such, you're never considered to be traveling away from home! However, your expenses for business essentials on the road could still be deductible in other ways. Check with your tax advisor about the specifics of operating an uprooted business.
There are more rules around the exact parameters of incorporating personal time into a business trip as well as the differences between trips on domestic versus foreign soil. We'll discuss all this later, with some tips on how to maximize tax-deductibility.
Basic Tax Deductions for Business Travel
Assuming you meet all the parameters required to claim tax deductions for business travel, you can claim the following:
- Transportation to Destination: Your actual cost to travel to your destination (e.g., plane, train, bus, car, etc.).
- Local Transportation at Destination: Taxis, public transportation, airport transfers, car rental, and any other cost of transportation that gets you to/from the hotel, between business meetings, etc. If you brought your car, use of your car at the destination qualifies.
- Meals: The meals must not be considered "lavish or extravagant" given the circumstances, and are only 50 percent deductible. You can either claim a standard meal allowance or the actual cost of your meals. Also, meals and accommodation for "non-working days" (more on that later) don't qualify.
- Accommodation: Cost of accommodation at your destination. Again, it must be reasonable. The honeymoon suite might be a touch extravagant. In fact, if you bring your family along, the IRA will only allow you to deduct the cost of equivalent accommodation for a single person.
- Gratuities: Keep track of tips you pay taxi drivers, porters, servers, etc.
- Dry Cleaning/Laundry: Glory hallelujah! Keep that dry cleaning or hotel laundry bill; they'll pay for your suit to be cleaned. Just don't bring your family's laundry as well. The IRA is keen to this plot.
- Communication: Any business calls you make (local or long distance), faxes you send, or internet connections you pay for are tax-deductible.
- Entertainment: Like meals, entertainment expenses are only 50 percent deductible and must have a business context. For example, if you take a client to a sports game or show and you discuss business at some point during the evening, it qualifies as a deduction.
- Miscellaneous Expenses: If you can justify the expense as something that helps you earn an income or conduct business, you can build a case for it to be tax-deductible.
Business versus Pleasure
You can incorporate some pleasure time into your trip and still have 100 percent of your transportation expenses (and even some accommodation and meals) covered. However, if the primary reason for your trip is pleasure (but you've mixed some business in there for good measure), then none of your transportation will be deductible. (This applies to domestic trips only; more on trips to foreign lands later).
The way the IRS determines if the trip is primarily for business or pleasure is somewhat fluid. Your days dedicated towards business must exceed those dedicated towards pleasure. Travel days are also considered business days, and even weekends and public holidays can be considered business days if you have to conduct business on the days before and after such that you can't reasonably return home.
Any expenses incurred on days that are not considered business days are not tax-deductible. This includes accommodation, meals, local transportation, and other incidentals. However, as long as your business days exceed your personal days, you can still claim 100 percent of your transportation expense to and from the destination.
Bringing Family Along
Generally speaking, you can't deduct any expenses paid for a spouse or dependent to accompany you on the trip. If you rent a larger room to accommodate your entourage, you can only claim the cost of a single room. Their meals and transportation are not covered; only the money spent on business-related expenses will be considered.
A small exception to this rule falls in the meals and entertainment category. If it is expected that spouses (or dependents) attend a business dinner, then you can deduct 50 percent of both your spouse's meal and yours.
Domestic versus Foreign Travel
With domestic trips, 100 percent of your transportation expenses are deductible even if some personal days are incorporated into the trip. However, this is not the case if the trip takes you off U.S. soil. Instead, you must allocate all expenses between business and pleasure, deducting only the business portion.
There are a few exceptions, and if you plan your foreign trip well, you can still deduct 100 percent of your transportation expenses.
If the trip is less than one week: If your trip is less than one week (not including the day you travel out, but including the day you return), and business days exceed personal days, then you can deduct 100 percent of your transportation expenses. As stated earlier, weekends and holidays that fall between business days still count as business days, as do days where your physical presence is required (even if you spend proportionally more time on pleasure activities those days).
If the trip is more than one week: If you spend at least 75 percent of your days on business for trips longer than one week, then you can deduct 100 percent of your transportation expenses. Business days include the day you travel out as well as the day you return, in addition to weekends and holidays, as mentioned above.
In both cases though, it bears reminding that nothing is deductible on personal days (no accommodation, local transportation, meals, etc.).
Travel for Conventions
Within North America: If you travel within North America to attend a convention and can prove that attending will benefit your business somehow, then the cost of the trip is deductible (taking into consideration the rules and limitations above).
Foreign: Attending a convention outside of North America requires additional due diligence in that you must be prepared to prove that it is reasonable for the meeting to be held outside of North America, and that at least 75 percent of your time is spent on business activities. Otherwise, you can deduct the cost of attending the convention (like registration fees), but nothing else.
Although it is always imperative to keep good records and receipts of tax deductions, it is especially important in the case of business travel. Here is what the IRS looks for:
- Who paid for the purchase? Make sure your name (or the business name) appears somewhere on the receipt. Credit card receipts are great for this.
- What was the price?
- Where was the expense incurred? A hotel? An airline ticket? A restaurant?
- When was the purchase made? (This is standard, and appears on most receipts).
- Why is it a business expense? I tend to write the reason on the back of the receipt itself, e.g., "airline ticket to X for a convention" or "lunch with client Y to discuss Z."
As mentioned earlier, instead of keeping records of each and every meal you purchase, you can choose to claim a standard amount for meal allowances. I tend to keep records and later determine which method would be most beneficial for tax-deduction purposes.
For more information on the latest requirements and fine print from the IRS about business travel, see the following pages:
- Tax Topic 511, Business Travel Expenses
- Publication 463, Travel, Entertainment, Gift, and Car Expenses